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Exempting Internet Access from Taxation Would Increase Fiscal Stress

Legislative leaders are considering a proposal to exempt the fees residential and commercial customers pay for Internet access from taxation under New Hampshire’s Communications Services Tax (CST).  If adopted, the proposal could reduce CST revenue significantly, perhaps by as much as $12 million annually.  As a result, the proposal would add to the fiscal stress New Hampshire faces now and in the future and could force policymakers to add to the hundreds of millions of dollars in spending cuts they imposed last year on areas such as higher education and health care.

As this Issue Brief explains, due to a federal law that pre-empts some states’ taxing authority, New Hampshire is one of only nine states in the country that is permitted to tax Internet access services.  While it may be in a distinct minority, its policy is nevertheless the correct one.  States that impose taxes on telecommunication services should not distinguish between communications accomplished over the telephone and those achieved via email or video chat.  Moreover, while some may maintain that barring this form of taxation is necessary to provide telecommunications companies a competitive environment, the industry appears to be flourishing in New Hampshire.  Finally, more targeted options for reducing the taxes paid by working families are available should policymakers wish to pursue that goal.

New Hampshire Can and Should Tax Internet Access

Under current law, New Hampshire imposes a 7 percent Communications Services Tax (CST) on the gross charges for intra- and inter-state communications services.  Importantly, the law defines “communications services” as:

services for transmitting, emitting, or receiving signs, signals, writing, images, sounds or intelligence of any nature by any electromagnetic system capable of 2-way communication and includes, without limitation, messages or information transmitted through use of local, toll and wide area telephone service…cable television; computer exchange services; mobile telecommunications services; facsimile services … or any other form, whether stationary, portable or mobile, of 2-way communications; or any other transmission of messages or information by electronic or similar means, between or among points by wire, cable, fiber-optics, laser, microwave, radio, satellite or similar facilities.[i]

Consequently, the law has been interpreted to include Internet access as a means of “2-way communication.”[ii]

The CST is projected to generate approximately $80 million in General Fund revenue in fiscal year (FY) 2012 and has produced in excess of $75 million per fiscal year (in constant FY 2012 dollars) over the last decade.  While the Department of Revenue Administration (DRA) does not maintain data on the amount of revenue produced by the inclusion of Internet access among the services taxable under the CST, it is likely substantial.  Data from the Federal Communications Commission indicate that, at the end of 2010, there were approximately 697,000 Internet connections in New Hampshire through various technologies (e.g. DSL, cable, mobile wireless).[iii]  If one assumes that the CST is imposed upon the gross charges for each of these connections and that consumers pay an average monthly charge of $20 for each connection, the annual revenue produced would on the order of $12 million.[iv]

At present, only nine states — Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Texas, Washington, and Wisconsin – impose some form of taxation on charges for Internet access.[v]  This situation has arisen, not because New Hampshire and this select group of states have chosen to act where others have refrained from doing so, but because most other states are actively prohibited by federal law from levying taxes on Internet access.  Originally enacted in 1998 and subsequently renewed through 2014, a federal law known as the Internet Tax Freedom Act (ITFA) effectively bars state and local governments from imposing taxes – whether general sales taxes or more narrow communications taxes – on Internet access services.  However, ITFA permits those states – like New Hampshire – that taxed Internet access prior to 1998 to continue to do so.

As a matter of policy, New Hampshire’s approach to telecommunications taxation is sound.  Substantively, there is no reason to distinguish between communications accomplished over the telephone and communications achieved via email or video chat.  Indeed, technologies like Voice over Internet Protocol (VoIP), services along the lines of Skype, and still newer advances such as Apple’s Face Time and Google+ Hangouts have certainly blurred, and may ultimately erase altogether, the distinction between voice- and data-based communications.  To cite one example of this trend, an April 2011 survey by the Pew Research Center’s Internet and American Life Project found that 24 percent of internet users – and 19 percent of all adult Americans – have placed a phone call online, up from 10 percent and 5 percent in April 2000.[vi]

Exempting Internet Access from Taxation Would Add to Current and Future Fiscal Stress

An analysis from the DRA of the impact that exempting Internet access services from taxation would have on state revenue is not yet available.  However, as noted above, the inclusion of such services in the base of the CST likely accounts for a substantial fraction of the revenue the tax produces.  As a result, removing them from the base would add significantly to the budgetary strains New Hampshire already faces.

While the state did end FY 2011 with a surplus of $17.7 million, a number of claims against those funds already exist.  For instance:

  • According to the Office of the Legislative Budget Assistant, the current budget, as initially adopted by the Legislature in June of last year, was expected to end the current fiscal year – FY 2012 – with a deficit of $14 million.[vii]
  • Through March, actual revenue collections within the General and Education Fund were roughly 1.8 percent below projections, due largely to disputes surrounding the Medicaid Enhancement Tax (MET) and to declines in tobacco tax revenue arising from a 10 cent reduction in the cigarette tax rate.[viii]  While New Hampshire may ultimately receive additional MET revenue, it is not yet clear that it will realize all of the remaining $37 million in outstanding collections.
  • Due to a federal audit of New Hampshire’s disproportionate share hospital (DSH) program dating to 2004, New Hampshire must refund $35 million in federal Medicaid funds; $9 million of that obligation will fall in FY 2012 and another $18 million will occur in FY 2013.[ix]

What’s more, policymakers have already enacted multiple changes in tax policy this session – with several more presently making their way through the legislative process – that will reduce tax revenue in future biennia without a clear indication that economic growth will be sufficient to compensate.  More specifically:

  • Last June, the Legislature chose to allow taxpayers to carry forward, for ten years rather than five, a credit for any Business Enterprise Tax (BET) that they may have paid that they can use to reduce their Business Profits Tax (BPT) liabilities; the change will take effect on July 1, 2014.[x]  Analysis from the DRA indicates that the revenue loss arising from the change could range from $32 M to $47 M annually, once fully implemented.[xi]
  • As part of the FY 2012-2013 budget, the Legislature elected to increase the limit – from $1 million to $10 million — on the net operating losses (NOL) that businesses may carry forward from one year to the next in order to reduce their BPT liabilities.  That change is currently scheduled to take effect on July 1, 2013, but legislation now before the Senate – HB 242 – would move its implementation to January 1, 2013.  The DRA anticipates that this increase in the NOL limit will reduce BPT revenue by as much as $20 million over 10 years, for each year that the increase is in effect.
  • Other legislation now under consideration would reduce revenue even further, including:
    • SB 295, which would increase the limit on the Research and Development Tax Credit from $1 million to $2 million annually (effective July 1, 2013);
    • SB 155, which would increase the amount of expenses businesses are allowed to deduct under the BPT (effective January 1, 2014, as approved by the Senate), and;
    • HB 1418, which would increase the threshold at which business entities begin to owe BET from $150,000 to $200,000 worth of gross receipts (effective December 31, 2013).

In other words, exempting Internet access services from the CST could trigger additional spending cuts to keep New Hampshire’s budget balanced over the FY 2012-2103 biennium and would dig still deeper the revenue hole the next Governor and Legislature will have to fill as they craft the FY 2014-2015 budget.

Telecommunications Industry Appears to be Thriving in New Hampshire

Proponents of exempting Internet access from the Communications Service Tax have suggested that such a move is essential to “maintaining our New Hampshire Advantage” and, by implication, creating economic conditions favorable to Internet service providers and other telecommunications companies.[xii]  Yet, data from the U.S. Bureau of Economic Analysis (BEA) indicate that the telecommunications industry has fared relatively well in New Hampshire in recent years.

As the figure at left illustrates, the telecommunications industry in New Hampshire has outperformed national and regional benchmarks on two important measures since the late 1990s.  Between 1997 and 2009, gross domestic product (GDP) attributable to the broadcasting and telecommunications sector in New Hampshire has grown by more than 10 percent per year on average, after adjusting for inflation. In contrast, it has grown by 7 percent per year on average for the nation as a whole and by just over 6 percent within New England. [xiii]  In addition, while data for corporate profits are typically unavailable on a state-by-state basis, one common proxy is a measure known as gross operating surplus.  After adjusting for inflation, the gross operating surplus for New Hampshire’s broadcasting and telecommunications sector grew by 6.6 percent per year on average between 1997 and 2009; within New England, it grew at less than half that rate over the same period – 3.1 percent per year on average.  For the entire US broadcasting and telecommunications sector, it grew by 3.8 percent during that timeframe.[xiv]

In short, even while Internet access has been subject to taxation, the industry responsible for delivering that service appears to be thriving in New Hampshire.

Exempting Internet Access is Poorly Targeted Tax Reduction

Others may support exempting Internet access services from the CST on the grounds that it provides a tax reduction to working families.  Yet, only a portion of the revenue lost to such a proposal would accrue to low- and moderate-income households, for at least two reasons.  First, some fraction of the revenue loss would flow to commercial customers; after all, nearly 1 in 7 Internet connections in New Hampshire are for businesses.[xv]  Second, as the figure at right illustrates, upper-income households are far more likely than low-income individuals and families to have Internet access.

While tax reductions of any kind would add to the fiscal stress New Hampshire now faces, other, potentially cheaper or more targeted options are available to policymakers.  For instance, New Hampshire’s Low Income Property Tax Relief program now offers tax rebates to certain homeowners for some or all of the statewide property tax they owe; in 2009, a total of $3.1 million in rebates were distributed under the program.[xvi]  The program could be enhanced in a variety of ways:  it could be extended to renters (who pay the statewide property tax in the form of higher rent); it could be expanded to include a portion of all the property taxes a household may owe, or; it could be enlarged to include families with incomes above the current eligibility ceiling of $40,000.

Alternatively, New Hampshire could follow the lead of more than twenty states and establish its own version of the federal Earned Income Tax Credit (EITC).  The EITC is a refundable tax credit that individuals and families who have earnings from a job can receive if their incomes are sufficiently low.[xvii]  According to the Brookings Institution, in 2007, some 76,000 individuals and families, representing a total of more than 214,000 people, were eligible to receive the federal EITC in New Hampshire.[xviii]  At a cost of approximately $12 million per year, New Hampshire could create its own EITC equal to 10 percent of the federal credit, but potentially reaching the same number of taxpayers.  Such a credit would deliver more than 90 percent of its benefits to taxpayers with incomes below $44,000 per year.[xix]


As part of its FY 2012-2013 budget, New Hampshire reduced funding for critical public priorities such as higher education, health care, and human services by hundreds of millions of dollars.  A proposal now before the Legislature could lead to still deeper spending cuts in order to exempt Internet access from the state’s Communications Services Tax.  The proposal could produce such an outcome even when there is no substantive reason to tax communications achieved over the Internet differently than those accomplished over the telephone and even as the telecommunications industry in New Hampshire appears to be flourishing relative to national and regional standards.  What’s more, should the Legislature decide to pursue further tax cuts this session, other, potentially cheaper or more targeted options for reducing taxes for working New Hampshire families are readily available.

[i] RSA §82 A:2

[ii] See for instance, New Hampshire Department of Revenue Administration, Technical Information Release, TIR 2008-006 September 15, 2008.

[iii] Internet Access Services: Status as of December 31, 2010, Industry Analysis and Technology Division, Federal Communications Commission, October 2011, p. 37.  Of this total, 592,000 were residential connections and 105,000 were for businesses.

[iv] Analyses from prior sessions of the Legislature suggest that the taxation of Internet access may be responsible for somewhat smaller stream of revenue.  For instance, in 2003, the House Ways & Means Committee reported as Inexpedient to Legislate HB 714, which would have exempted cable-based Internet services from taxation, noting that the state would have lost up to $5 million in CST revenue per year if the bill were enacted.  See http://gencourt.state.nh.us/SofS_Archives/2003/house/HB714H.pdf for more information.  Similarly, testimony provided to the Senate Energy & Economic Development Committee on SB 94 in 2005 by a representative of Verizon suggested an annual revenue loss of $7.7 million if Internet services were exempted from the CST. The full Committee report on that measure is available at http://gencourt.state.nh.us/SofS_Archives/2005/senate/SB94S.pdf.  However, a recent survey by the Pew Research Center’s Internet and American Life Project found that, as of April 2009, American consumers paid an average of $37.60 per month for home Internet access.  While these figures are not specific to New Hampshire and do not account for monthly charges for mobile access to the Internet, they do point to a larger potential revenue loss.  See Horrigan, John, Home Broadband Adoption 2009, Pew Internet and American Life Project, June 2009, p. 29, available at http://pewinternet.org/~/media//Files/Reports/2009/Home-Broadband-Adoption-2009.pdf.

[v] Mazerov, Michael, Making the ‘Internet Tax Freedom Act’ Permanent Could Lead to a Substantial Revenue Loss for States and Localities, Center on Budget and Policy Priorities, August 30, 2007, p. 4.

[vi] Rainie, Lee, “24% of internet users have made phone calls online,” Pew Internet and American Life Project, May 30, 2011, available at http://www.pewinternet.org/~/media//Files/Reports/2011/


[vii] Office of the Legislative Budget Assistant, Comparative Statement of Undesignated Surplus, June 29, 2011, available at: http://www.gencourt.state.nh.us/lba/Budget/operating_budgets/2012_2013/


[viii] Department of Administrative Services, Monthly Revenue Focus – March FY 2012, p. 3.

[ix] State of New Hampshire, Information Statement, March 26, 2012

[x] Chapter 225, Acts of 2011 (HB 187)

[xi] Office of the Legislative Budget Assistant, Fiscal Note Worksheet – HB 187, June 3, 2011

[xii] Rayno, Gary, “Legislative budget writers want Internet tax clarification,” New Hampshire Union Leader, April 13, 2012

[xiii] NHFPI calculations based on US Bureau of Economic Analysis data.  Data are for the broadcasting and telecommunications sector (NAICS Code #148) within the Information supersector and are expressed in chained 2005 dollars.

[xiv] NHFPI calculations based on US Bureau of Economic Analysis data.  Data are for the broadcasting and telecommunications sector (NAICS Code #148) within the Information supersector and are expressed in constant 2005 dollars using the Consumer Price Index (CPI).  The Bureau of Economic Analysis defines “gross operating surplus” as the “business income of private domestic enterprises (corporate profits before tax with inventory valuation adjustment and without capital consumption adjustment, proprietors’ income with inventory valuation adjustment and without capital consumption adjustment, rental income of persons without capital consumption adjustment)” plus the following:  “net interest and miscellaneous payments; business current transfer payments (net); capital consumption allowances; consumption of fixed capital of government, households, and institutions; and current surplus (or deficit) of government enterprises.”

[xv] See note iii.

[xvi] New Hampshire Fiscal Policy Institute, An Overview of New Hampshire’s Tax System, December 2010, p. 12.

[xvii] For more on the history and design of the EITC, see http://www.taxcreditsforworkingfamilies.org

[xviii] Brookings Institution, Metropolitan Policy Program, Characteristics of EITC-Eligible Taxpayers, 2007 – New Hampshire, p. 1.  Available at http://www.brookings.edu/~/media/Files/Programs/Metro/EITC/New%20Hampshire.pdf

[xix] Institute on Taxation and Economic Policy, April 2012 estimate.  The cost cited here excludes the cost of administering the program.

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New Data Show Food Insecurity Levels Declining Prior to the COVID-19 Crisis

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